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Real Exchange Rate Behaviour Under Hong Kong'S Linked Exchange Rate System: An Empirical Investigation

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  • ZHICHAO ZHANG

    (Department of East Asian Studies, Durham University, Durham, England DH1 3TH, UK)

Abstract

In a behavioural equilibrium exchange rate model, this study investigates the movements of the real exchange rate of the Hong Kong dollar under the currency board arrangement from 1984 to 1998. Cointegration analysis based on Johansen approach is applied to derive the equilibrium real exchange rate in behavioural sense for the Hong Kong dollar. Evidence shows that during the period under investigation, the Hong Kong dollar was initially undervalued when the currency board arrangement was installed. It moved in closer line with the equilibrium rate after 1985 and generally remained moderately undervalued until 1993. Then the currency became overvalued following the upsurge of domestic demand and lingered into 1995 before an adjustment took place latter that year. But except for a few quarters, the overvaluation was not substantial and chronic. On the whole, the Hong Kong dollar seemed to have performed well in the period under examination. In most cases, the currency was actually undervalued. When the Asian financial crisis broke out, the currency was in effect already in a process of adjustment, depreciating form an overvalued level.

Suggested Citation

  • Zhichao Zhang, 2002. "Real Exchange Rate Behaviour Under Hong Kong'S Linked Exchange Rate System: An Empirical Investigation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 55-78.
    • Handle: RePEc:wsi:ijtafx:v:05:y:2002:i:01:n:s0219024902001341
    DOI: 10.1142/S0219024902001341
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    Cited by:

    1. MASUJIMA Yuki, 2015. "Assessing Asian Equilibrium Exchange Rates as Policy Instruments," Discussion papers 15038, Research Institute of Economy, Trade and Industry (RIETI).
    2. Jongwanich, Juthathip, 2009. "Equilibrium Real Exchange Rate, Misalignment, and Export Performance in Developing Asia," ADB Economics Working Paper Series 151, Asian Development Bank.
    3. Atabani Adi Agya & Du Jun, 2015. "Estimate of Equilibrium Real Exchange Rate and Misalignment of Chinese Yuan Vis-a-Vis US Dollar," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 1(3), pages 148-165, September.

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